Newly-Enacted Economic Opportunity Zone Program Offers Significant Tax Benefits To Investors
One provision of the Tax Cuts and Jobs Act (TCJA) that flew under the radar until recently is the new “Opportunity Zone” program. The Opportunity Zone program is designed to promote investment in specific economically-distressed communities selected by the states and approved by the IRS.
Taxpayers receive significant tax benefits by investing in a Qualified Opportunity Fund (“QOF”) which, in turn, invests the capital in pre-designated Opportunity Zones. Specifically, a taxpayer may sell an asset and reinvest the net gain in a QOF.
The investment of the net gain in a QOF can:
- Temporarily defer tax on the gain
- Potentially eliminate up to 15% of the tax on the deferred gain
- Exclude from tax the future appreciation on the net gain invested
Who can benefit?
If a taxpayer owns an appreciated asset, such as real estate, the taxpayer can sell the property to an unrelated third party and re-invest the gain in a Qualified Opportunity Fund. The re-investment must be made within 180 days of the sale. An affirmative election is required to defer the gain. Note that the taxpayer does not have to reinvest all the sale proceeds, only an amount equal to the net gain.
For example, if a taxpayer bought a piece of land for $100 that is now worth $300, the taxpayer can sell the property and reinvest the net gain of $200 in a QOF. The taxpayer only needs to reinvest $200, not the entire $300 of sale proceeds. This is quite different from the “like-kind exchange” rules which require all sale proceeds to be rolled over into another piece of replacement real property. Also, because the Tax Cuts and Jobs Act limited “like-kind exchanges” to only include real property, the Opportunity Zone program is very attractive for taxpayers with highly-appreciated, non-real estate assets now disqualified from like-kind exchange treatment.